CLO AAA spreads continue to tighten in early 2018

Spreads for U.S. CLO AAA notes continue to tighten in early 2018 with the average AAA discount margin dipping south of 110bp in mid-February down from 113bp at the end of December. Thinner pricing has been led by Zais Group’s US$460m CLO which came to market in early February and priced the AAA tranche at 95bp. They have been promptly followed by a US$504.7m CLO issued by Palmer Square Capital Management which saw AAA spreads tighten further to 60bp. Several other deals priced in the 100-115bp range over the last month and a half, sending the average AAA discount margin to new lows. CLO issuance remains steady with year-to-date volume at nearly US$14bn. Adding to market optimism around CLO growth prospects are the revised 2018 bank forecasts of CLO growth in the wake of a court ruling on February 8th which exempts CLO managers from the 5% risk retention rule signed into law in 2010. Following Deutsche Bank’s announcement of its adjusted projections (in the wake of the ruling), which increased new CLO issuance to US$120bn (up from US$110bn) for the year, both Morgan Stanley and Citi announced their own updated forecasts. Morgan Stanley increased its forecast of 2018 CLO issuance to US$110m (from US$100bn) while Citi left its US$140bn of new issuance unchanged but upsized its expectation of reworked CLO volume to US$110bn for refinancings and US$120bn for resets.

Contact: Maria Dikeos
maria.dikeos@thomsonreuters.com